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Global rules on foreign direct investment (FDI)
Cross-border acquisitions and investments increasingly trigger foreign direct investment (FDI) screening requirements.
United Kingdom | Publication | febrero 2021
This judgment from the UK Supreme Court provides clarification on the English courts’ treatment of jurisdictional challenges in the context of a claim brought against a UK domiciled parent company and its foreign domiciled subsidiary for alleged torts overseas. In so doing, the Court considered (without making any findings) the circumstances in which a parent company may owe a duty of care to claimants who allege harm caused by its subsidiary.
The decision follows the landmark judgment from the UK Supreme Court in Lungowe v Vedanta (Vedanta) in 2019 which similarly dealt with issues of parent company liability. This judgment highlights again1 that an English domiciled parent company may be liable in the English courts for claims brought by non-UK claimants, where the parent company can be shown to owe a duty of care towards the claimants for the acts of its subsidiary.
Residents of the Niger Delta, Nigeria, brought two sets of proceedings in negligence against English-incorporated Royal Dutch Shell Plc (RDS) and its Nigerian operating subsidiary, Shell Petroleum Development Company of Nigeria Ltd (SPDC)2, claiming that they had suffered harm as a result of oil spills from the pipelines operated by a joint venture in which SPDC had a 30% participating interest.
RDS applied for orders that the English courts had no jurisdiction to try the claims or, alternatively, that they should not exercise that jurisdiction as there was no arguable case that RDS owed the claimants a duty of care. The case could only proceed to a trial of the substantive issues if RDS could be established as the anchor defendant for the purpose of attracting the English courts’ jurisdiction over the claim, with the foreign subsidiary SPDC joined as a necessary and proper party. It was common ground that the applicable test was whether there was a real issue to be tried, meaning that the claimants’ claims had a real prospect of success (this is the summary judgment test).
In January 2017, the High Court decided in favour of the defendants on the basis that the claimants had failed to present a properly arguable case that RDS owed them a duty of care. This decision was upheld by the Court of Appeal in February 2018, which found that there was no arguable case that RDS owed the claimants a common law duty of care to protect them against foreseeable harm caused by the operation of SPDC. Sales LJ gave a dissenting judgment explaining why he considered there was a good arguable case that RDS did owe the appellants a duty of care. Reversing these decisions, the Supreme Court unanimously allowed the appeal in favour of the claimants.
In considering the appeal, the Supreme Court addressed the following issues:
The claimants contended that the Court of Appeal had materially erred in law in its analysis of:
The Supreme Court focused on the second issue and held that the Court of Appeal had materially erred in law with respect to the procedure for determining the arguability of the claim at an interlocutory stage, and by its approach to both contested factual issues and to the relevance and significance of likely future disclosure.
The Court of Appeal had taken an incorrect approach by conducting a mini-trial of the substantive issues. It had wrongly been drawn into considering the contested factual issues and the documentary evidence that had been disclosed in relation to such issues. This was inappropriate for the determination of a jurisdictional challenge, which is dependent upon whether the appeal satisfies the summary judgment test of real prospect of success at trial.
As in Vedanta, the Supreme Court was clear that the focus should be on the claimants’ pleaded case and whether, on the basis of that pleaded case, the claimants have an arguable claim. Where there are factual assertions in the pleaded case, they should be accepted unless they are demonstrably untrue or unsupportable. There should also be consideration as to whether there is a real prospect of relevant and significant disclosure being provided at trial.
The Supreme Court then dealt with the two further errors in law alleged to have been made by the Court of Appeal in relation to parent company liability, although given its findings in relation to the ‘mini trial’ above, it did not make a ruling on whether these errors were material.
Noting that the approach of the Court of Appeal had to be considered in light of the later guidance given by the Supreme Court in Vedanta, the Court made the following key observations:
The second issue for the Supreme Court to determine was whether the majority of the Court of Appeal was wrong to decide that there was no real issue to be tried.
The Supreme Court held that there was a real issue to be tried. The Supreme Court held that the factual assertions in the claimants’ particulars of claim should not be rejected as being demonstrably untrue or unsupportable such that the claimants had no arguable claim. This was supported by two corporate documents, the evidence of the claimants’ factual witnesses and the real prospect of relevant and significant future disclosure regarding, for example, the extent of RDS’s management or control of SPDC’s operations. The Court also referred to the vertical corporate structure of the group organised on business and functional lines (rather than according to corporate status) in support of its conclusions. These factual issues and the question of liability will only be determined at a later stage in these proceedings.4
This Supreme Court judgment highlights again5 that an English domiciled parent company may be liable in the English courts for claims brought by non-UK claimants, to the extent the parent company can be shown to owe a duty of care towards the claimants for the acts of its subsidiary.
Whilst these issues await determination on their substance, the comments from the Supreme Court (together with those in Vedanta) may guide corporates in reviewing how their organisational structures, corporate documents and disclosures may contribute to potential parent company risks. These issues will need to be carefully considered taking into account countervailing imperatives including the expectations of investors, reputational risks, the group’s commercial realities and evolving legislation including ESG-related disclosure requirements and emerging mandatory human rights due diligence laws.
The key takeaway from these two decisions is that the bar for claimants commencing proceedings in the English courts against parent companies and their international subsidiaries for alleged harms caused in other jurisdictions is lower than previously thought and we will see more cases proceed to merits hearings (including the critical disclosure phase).
Reiterating previous statements the Supreme Court also emphasised the importance of proportionality with respect to the litigation of jurisdiction issues. When determining whether there is a real issue to be tried, the main consideration will be the claimant’s pleaded case, which means that factual evidence and disclosure can and should be kept to a minimum.
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